Leverage allows traders to open positions larger than their actual capital by borrowing funds (often from a cryptocurrency exchange or broker) to increase the potential return on an investment. While leverage can amplify gains, it can also amplify losses, making it a high-risk, high-reward strategy.
Leverage is usually expressed as a ratio, such as 2:1, 5:1, or 10:1, indicating the multiple by which a trader can increase their position size. For example, with 10x leverage, a trader can control $10,000 worth of cryptocurrency with just $1,000 of their own capital. The remaining $9,000 is provided by the exchange or broker.
Key concepts related to leverage include margin, long and short positions, liquidation, and ratios. Margin is the amount of capital a trader must put up to open a leveraged position; it represents a fraction of the total value of the position and acts as collateral for the borrowed funds. Leverage ratios can vary depending on the exchange and the cryptocurrency, and some exchanges offer high leverage options (e.g., 50x or 100x), but such high leverage comes with significant risk.
Cryptocurrencies are also notoriously volatile, and while this can create opportunities for gains, it also increases the risk of rapid price swings that can trigger liquidation; a small adverse move in the market can wipe out a trader’s initial capital. For instance, if the price moves too far against a leveraged position, and the losses exceed the margin, the exchange may liquidate the trader’s position to protect the borrowed funds, causing the trader to lose their margin.
Learn more about leverage trading.
